Monday, August 31, 2015

As in the series on Austrian economics, not all posts actually debunk Marxism, but sometimes provide outlines or summaries of Marxist theory or interesting points on Marxism or Karl Marx’s life and thought. There are also some points where constructive things can be said: on endogenous money, the falsity of Say’s law and the monetary theory of production, how some of Marx’s economic thought anticipated Keynes, but even here the discussions in Marx’s Capital are simply obsolete and have long been superseded by modern Post Keynesian theory, and are mainly of historical interest.

In what follows, sometimes Marxist economic theory will be debunked by means of Post Keynesian economics (which is what this blog advocates), though frequently I have my own original criticisms or follow the arguments of other critics of Marxism.

It is important to remember that Post Keynesian economics – although it has severe criticisms of laissez faire capitalism and neoclassical or Austrian economics – is still strongly distinct from Marxist economics. Post Keynesian economics is not Marxism, and leading Post Keynesians and economists whose work has been foundational for Post Keynesian economics have rejected the labour theory of value, the basis of Marxist economics.

John Maynard Keynes, for example, said that Marx’s theories were founded “on a silly mistake of old Mr Ricardo’s” (Skidelsky 1992: 517) – namely, the labour theory of value. For Michał Kalecki and Joan Robinson the labour theory of value was “metaphysical” (Brus 1977: 59; Robinson 1964: 39), and for Piero Sraffa it was “a purely mystical conception” (Kurz and Salvadori 2010: 199). If the labour theory of value is unsound, then the whole Marxist edifice constructed on it cannot but fall and collapse. Moreover, the classical Marxist idea of historical determinism is also incompatible with the Post Keynesian idea of the fundamental uncertainty of the future.

For an overview of why the labour theory of value is wrong, see this post:

For a detailed discussion of how Marx and Engels continued to think of the theory of value in volume 1 of Capital as an empirical theory of pre-modern commodity exchange before modern capitalism (where prices of production are anchors for the price system), see here:

(i) Bibliographical Posts.(ii) Marx and Engels’ Works Online(iii) Karl Marx’s Life 1818–1883(iv) Documentaries about and discussions of Karl Marx and Marxism.(v) Against the labour theory of value.(vi) On the alleged tendency of the rate of profit to fall.(vii) On Marx’s “Critique of the Gotha Program.”(viii) Discussions of David Harvey’s lectures on Reading Marx’s Capital Volume 1.(ix) Steve Keen on Marxism.(x) On Marx’s views on phrenology and race.(xi) On Marx’s views on slavery.(xii) Marxism and authoritarianism.(xiii) Against Marx’s Communist Manifesto.(xiv) Against Sraffian and Marxist long-run equilibrium.(xv) Chomsky and Marxism.(xvi) Against Temporal Single System Marxism (TSSI)(xvii) Marx’s Monetary Theory
(xviii) Marx versus Keynes (xix) Critical Summaries of Volume 1 of Capital.

I also recommend my series of posts that are critical chapter by chapter summaries of volume 1 of Capital in section xix below.

Kurz, Heinz D. and Neri Salvadori. 2010. “Sraffa and the Labour Theory of Value: A Few Observations,” in John Vint et al. (eds.), Economic Theory and Economic Thought: Essays in Honour of Ian Steedman. Routledge, London and New York. 189–215.

Saturday, August 29, 2015

It is a crucial point: Austrians complain about asset bubbles, but their Austrian business cycle theory (ABCT) or economic theory in general does not focus on stock market speculation or asset bubbles as a fundamental and inherent means by which an economy is destabilised.

For example, in the ABCT it is real and unsustainable higher-order capital investment that is supposed to wreck the economy, not debt-financed asset speculation.

The Austrians today are falsely claiming that they have some kind of prescient theory explaining the recent stock market gyrations or asset bubbles. This is rubbish.

Karen I. Vaughn in her excellent book Austrian Economics in America: The Migration of a Tradition hits the nail on the head:

“Mises never discusses the possibility of systematic speculative error except in the context of his trade cycle theory, in which speculators-investors are misled by improper monetary signals emanating from a fractional reserve banking. Yet if the future cannot be predicted, or as Shackle would say, if the future is created out of the actions of the past, why is it not least conceivably possible for speculative activity to be on net incorrect at least some of the time? Certainly, we have the empirical evidence of speculative bubbles that are endogenous to markets as an example of market instability. One would think that the extent and potential limiting factors that affect such endogenous instabilities would be of great importance for fully understanding market orders, yet it is an issue surprisingly missing in the Austrian literature. Hence, although, we can appreciate the force of Mises’ argument as far as it goes, it seems that a crucial part of the case for the effective functioning of a market economy is missing.” (Vaughn. 1994: 87–88).

Vaughn is entirely correct: the Austrians’ trade cycle theory is flawed by failing to take into account asset bubbles in a systemic theoretical way.

When we add to this the failure to understand and apply to economic theory the concepts of fundamental uncertainty, subjective expectations, debt deflation, and wage and price rigidities, as well as their commitment to bankrupt ideas like loanable funds theory, we have one deeply defective and unsound theory.

BIBLIOGRAPHY
Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.

In particular, doesn’t Murphy in this paper accept that Sraffa was right about the natural rate of interest?:

“In his brief remarks, Hayek certainly did not fully reconcile his analysis of the trade cycle with the possibility of multiple own-rates of interest. Moreover, Hayek never did so later in his career. His Pure Theory of Capital (1975 [1941]) explicitly avoided monetary complications, and he never returned to the matter. Unfortunately, Hayek’s successors have made no progress on this issue, and in fact, have muddled the discussion. As I will show in the case of Ludwig Lachmann—the most prolific Austrian writer on the Sraffa-Hayek dispute over own-rates of interest—modern Austrians not only have failed to resolve the problem raised by Sraffa, but in fact no longer even recognize it.

Austrian expositions of their trade cycle theory never incorporated the points raised during the Sraffa-Hayek debate. Despite several editions, Mises’ magnum opus (1998 [1949]) continued to talk of ‘the’ originary rate of interest, corresponding to the uniform premium placed on present versus future goods. The other definitive Austrian treatise, Murray Rothbard’s (2004 [1962]) Man, Economy, and State, also treats the possibility of different commodity rates of interest as a disequilibrium phenomenon that would be eliminated through entrepreneurship. To my knowledge, the only Austrian to specifically elaborate on Hayekian cycle theory vis-à-vis Sraffa’s challenge is Ludwig Lachmann.”
(Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” pp. 11–12).

And now the crucial quotation from Murphy:

“In summary, Austrians should familiarize themselves with the construct of a dynamic equilibrium, in which spot prices and other data can evolve over time, but where entrepreneurs fully anticipate such changes and squeeze out all pure profit opportunities. In this setting, there is no such thing as an objective real or natural rate of interest, so the Austrians cannot cling to their prescription that the banks ought to set the market rate to ‘the’ natural rate. However, as our last scenario above hoped to convey, it still is true that an intertemporal, dynamic equilibrium can be disturbed if commercial banks inject new money into the credit markets. If a Misesian boom-bust cycle ensues, the reason is not that the banks charged a money right below ‘the’ natural rate, because there is no such thing.”
(Robert P. Murphy, “Multiple Interest Rates and Austrian Business Cycle Theory,” p. 23).

So in print before our eyes Murphy has rejected the Wicksellian natural rate of interest – a “natural” and market rate of interest that would equilibrate savings and investment. We can add to this the rather embarrassing point that Murphy also agrees with Keynes that interest rates are a monetary phenomenon and a great part of Murphy’s PhD is devoted to defending a monetary theory of interest (as opposed to the Wicksellian theory).

But his recent defence of the ABCT just assumes that such a single Wicksellian natural rate of interest exists and doesn’t even mention his own rejection of the concept.

Is Murphy capable of explaining to us why the classical Austrian business cycle theory doesn’t collapse to its foundations if the natural rate is untenable as argued in his paper “Multiple Interest Rates and Austrian Business Cycle Theory”? Isn’t this massive hypocrisy on his part?

There are also a couple of other points I can’t resist addressing. Murphy in his article states the following:

“Entrepreneurs still get the green light to start longer term investment projects, but the economy lacks the real savings necessary to bring them to fruition.

Such has been the condition of the U.S. and other major economics since the extraordinary interventions by central banks after the 2008 financial crisis.”
Murphy, Robert P. 2015. “Mises and the Market,” Dailycaller.com, 26th August
http://dailycaller.com/2015/08/26/mises-and-the-market/

This is of course a claim from the classical ABCT: that artificially low interest rates drive excessive investment and create massive malinvestment leading to real capital scarcity and shortages and in some cases actually lack of resources to finish projects.

Anyone can see that this is a bizarrely – if not insanely – inaccurate description of capitalist economies since 2008, where there was massive idle resources, huge unemployment and significant unused industrial capacity.

It is also especially laughable because right after the quotation above, Robert Murphy correctly remarks that QE has helped to create huge stock and share market speculation, and this effectively admits that QE wasn’t being used to finance massive real investment driving alleged malinvestment by industrial firms or in real capital projects.

All in all, the Austrian story on modern capitalism is refuted by the empirical evidence and in Murphy’s case refuted by his own previously expressed ideas on the non-existence of the natural rate of interest.

Next, Engels mentions that Werner Sombart, in a review of Marx’s work (Sombart 1894), declared that the labour theory of value as presented in volume 1 of Capital could not be empirically supported and was a mere “logical” concept (Marx 1991: 1032) (that is, in modern terms, a non-empirical and “analytic” concept true by definition and proposed as an identity or definition).

So, too, Conrad Schmidt in an 1895 review of volume 3 (Schmidt 1895) had also declared that the labour theory of value was a “necessary fiction” (Marx 1991: 1032). Engels describes Schmidt’s criticisms:

“Schmidt, too, has his formal reservations about the law of value. He calls it a scientific hypothesis put forward to explain the actual exchange process, which proves the necessary theoretical point of departure, illuminating and indispensable even for the phenomena of prices under competition, which appear completely to contradict it. Without the law of value, in his opinion too, any theoretical insight into the economic mechanism of capitalist reality is impossible. In a personal letter which he has allowed me to mention, Schmidt declares that the law of value in the capitalist form of production is a fiction, though a theoretically necessary one.” (Marx 1991: 1032).

Now it is clear that Engels’ “law of value” here is referring to the idea that commodities tend to exchange at their pure labour values.

Engels was well aware that hostile critics of Marx had declared that volume 3 of Capital utterly contradicted and overthrew the theory of value in volume 1. In fact, it seems that Conrad Schmidt was actually one of the first to point out the contradiction between commodities tending to exchange at their labour values and an average rate of profit in his 1889 work Die Durchschnittsprofitrate auf Grundlage des Marxschen Wertgesetzes [The Average Rate of Profit on the basis of Marx’s Law of Value] (Stuttgart, 1889) (see Böhm-Bawerk 1949: 28, with n. 2).

Engels desperately sought a solution and found a passage in volume 3 of Capital where Marx himself was trying to salvage the theory of value in volume 1, which had been overthrown by that in volume 3.

That passage of Marx comes in Chapter 10 of volume 3 and is as follows:

“The exchange of commodities at their values, or approximately at their values, requires, therefore, a much lower stage than their exchange at their prices of production, which requires a relatively high development of capitalist production.

Whatever may be the way in which the prices of the various commodities are first fixed or mutually regulated, the law of value always dominates their movements. If the labor time required for the production of these commodities is reduced, prices fall; if it is increased, prices rise, other circumstances remaining the same.

Aside from the fact that prices and their movements are dominated by the law of value, it is quite appropriate, under these circumstances, to regard the value of commodities not only theoretically, but also historically, as existing prior to the prices of production. This applies to conditions, in which the laborer owns his means of production, and this is the condition of the land-owning farmer and of the craftsman in the old world as well as the new. This agrees also with the view formerly expressed by me that the development of product into commodities arises through the exchange between different communes, not through that between the members of the same commune. It applies not only to this primitive condition, but also to subsequent conditions based on slavery or serfdom, and to the guild organisation of handicrafts, so long as the means of production installed in one line of production cannot be transferred to another line except under difficulties, so that the various lines of production maintain, to a certain degree, the same mutual relations as foreign countries or communistic groups.

In order that the prices at which commodities are exchanged with one another may correspond approximately to their values, no other conditions are required but the following: 1) The exchange of the various commodities must no longer be accidental or occasional, 2) So far as the direct exchange of commodities is concerned, these commodities must be produced on both sides in sufficient quantities to meet mutual requirements, a thing easily learned by experience in trading, and therefore a natural outgrowth of continued trading, 3) So far as selling is concerned, there must be no accidental or artificial monopoly which may enable either of the contracting sides to sell commodities above their value or compel others to sell below value. An accidental monopoly is one which a buyer or seller acquires by an accidental proportion of supply to demand.

The assumption that the commodities of the various spheres of production are sold at their value implies, of course, only that their value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium.” (Marx 1909: 208–210).

So here Marx was saying that the theory of value in volume 1 – that commodities tend to exchange at their pure labour values which are anchors for the price system – was a historically contingent phenomenon existing in the “lower stage … of capitalist production” and before the emergence of a higher stage of capitalism where Ricardo’s prices of production are the anchors for the price system.

It is particularly interesting to note how Marx specifically described the theory of value in volume 1 as follows:

“The assumption that the commodities of the various spheres of production are sold at their value implies, of course, only that their value is the center of gravity around which prices fluctuate, and around which their rise and fall tends to an equilibrium.” (Marx 1909: 208–210).

This and Marx’s whole discussion around the passage clearly damn and refute all those pathetic Marxist hacks who want to tell us that the law of value in volume 1 – namely, that commodities tend to exchange at their pure labour values which are anchors for the price system – is only a “simplifying assumption” or some highly abstract system never intended to apply to the real world.

Clearly Marx did even in volume 3 of Capital apply it to the capitalist system in an empirical sense, but to those historical periods at a “lower stage … of capitalist production” confined to the older medieval and pre-modern eras. Crucially, this is exactly how Engels interpreted the passage, as we can see below in a quotation from Engels’ supplement to volume 3.

Engels cites the passage I have quoted above from volume 3 of Capital and says this:

“If Marx had been able to go through the third volume again, he would undoubtedly have elaborated this passage significantly. As it stands, it gives only an outline sketch of what needs to be said on the point in question. Let us therefore go into the matter somewhat more closely.

We all know that at the beginnings of society products are used by the producers themselves, these producers living in indigenous communities that are organized more or less on a communist basis; that the exchange of their surplus products with foreigners, which introduces the transformation of products into commodities, is of later date. It takes place first of all simply between individual communities of different tribes and only later does it come to prevail within the community, where it makes a decisive contribution to the dissolution of this community into larger or smaller family groups. Even after this dissolution, however, the family heads who exchange with one another remain working peasant farmers, who produce almost all their requirements on their own holdings, with the aid of their families, and obtain only a small portion of the items they need from outside, in exchange for their own surplus product. Not only does the family pursue agriculture and stock-raising, it also works up the products of these activities into finished articles of use, still doing its own milling in places with their hand mill, baking bread, spinning, dyeing, weaving flax and wool, curing leather, erecting and repairing wooden buildings, producing tools and equipment, and often doing its own carpentry and metalwork too; so that the family or family group is basically self-sufficient.

Now the little that such a family has to obtain from others by exchange, or buy, consisted right up to the early nineteenth century, in Germany, predominantly of objects of handicraft production, i.e. things whose mode of production was in no way strange to the peasant and which he himself failed to produce only because either the raw material was unavailable or the purchased article was much better or very much cheaper. For the peasant of the Middle Ages, therefore, the labour-time needed to reproduce the objects he obtained in exchange was quite accurately known. The village smith and cartwright were at work under his very eyes; similarly the tailor and shoemaker, who in my own youth still travelled round to our Rhineland peasants in turn, working up materials provided into clothes and shoes. Both the peasant and the people from whom he bought were workers themselves, and the articles exchanged were their own products. What had they applied in the production of these articles? Labour, and labour alone: to replace tools, to produce raw material and work it up, all they spent was their own labour-power; how else then could they exchange these products of theirs with those of other working producers than in proportion to the labour applied to them? The labour-time applied to these products, then, was more than just the most suitable measure for the quantitative determination of the magnitudes to be exchanged; no other measure was possible. Or are we to believe that peasant and village artisan were so stupid that one of them would part with the product of ten hours’ labour for that of a single hour? For the entire period of natural peasant economy, no other exchange is possible except that in which the amounts of commodities exchanged tend more and more to be measured according to the amounts of labour embodied in them. From the moment money penetrates into this economic mode, the tendency of adaptation to the law of value (Marx’s formulation, nota bene!) becomes more explicit, though it is already infringed by the interventions of usurer’s capital and fiscal extortion, so that the periods over which prices approximate on average to values, down to a negligible difference in magnitude, already become more drawn out.

The same applies to exchange between the products of peasants and those of urban artisans. At the beginning, this takes place directly, without the mediation of the merchant, on the town market-days when the peasant sells and makes his purchases. Here, too, the artisan’s conditions of labour are known to the peasant, and the peasant’s to the artisan. He is himself still one part peasant, and not only has his kitchen-garden and orchard but also very often a bit of a field, one or two cows, pigs, fowl, etc. People in the Middle Ages were thus in a position to reckon up each other’s production costs in raw and ancillary materials, and in labour-time, with a fair degree of accuracy – at least as far as articles of general daily use were concerned.

But how could the amount of labour be reckoned, even indirectly and relatively, when this served as the measure of exchange for products that required more prolonged labour, interrupted and at irregular intervals, and uncertain in its results, products like corn or cattle, for instance? And, moreover, with people who were unable to count? Evidently, only by a lengthy process of zig-zag approximation, often groping back and forth in the dark, in which, as in other things, wisdom was attained only by painful accident. But the need for each person to have a rough idea of his own costs helped time and again in the correct direction, and the small number of types of article coming into exchange, as well as the stable mode of their production, often over centuries, made the goal more easily attainable. That it in no way took so long until the relative values of these products were established with a fair degree of accuracy is shown by the simple fact that the commodity in which this seems most difficult on account of the long production time of the individual item, i.e. cattle, was the first fairly generally recognized money commodity. In order to arrive at the value of cattle, its exchange ratio with a whole series of other commodities must already have won established recognition to a relatively unusual degree, it must be unchallenged over an area of several tribes. And the people of that time were certainly clever enough – the cattle-breeders as well as their customers – not to part with the labour-time they had spent without an equivalent in exchange. On the contrary, the closer people stand to the original state of commodity production – e.g. Russians and Orientals – the more time they still spend today in extracting full compensation for the labour-time spent on a product by long and stubborn haggling.

Proceeding from this determination of value by labour-time, commodity production as a whole, and with it the manifold relationships in which the different aspects of the law of value make themselves felt, now develops as presented in Part One of Capital Volume 1; therefore, in particular, the conditions become established under which labour is value-forming. These conditions, moreover, prevail although those involved do not become aware of them, so that they can be abstracted from everyday practice only by tedious theoretical analysis; they operate in the form of a natural law, which as Marx showed followed necessarily from the nature of commodity production. The most important and incisive progress was the transition to metal money, but this had the consequence that the determination of value by labour-time was no longer visibly apparent on the surface of commodity exchange. Money became the decisive measure of value for practical purposes, and all the more so, the more diverse were the commodities coming into trade, the more they originated from distant countries, and the less therefore the labour-time needed for their production could be checked. Even the money itself came mostly from abroad at first; and when it was obtained in a particular country as precious metal, the peasant and artisan were in no position to assess even approximately the labour applied to it, while their own awareness of the value-measuring property of labour was also pretty well obscured by the custom of reckoning in money; money came to represent absolute value in the popular conception.

To sum up, Marx’s law of value applies universally, as much as any economic laws do apply, for the entire period of simple commodity production, i.e. up to the time at which this undergoes a modification by the onset of the capitalist form of production. Up till then, prices gravitate to the values determined by Marx’s law and oscillate around these values, so that the more completely simple commodity production develops, the more do average prices coincide with values for longer periods when not interrupted by external violent disturbances, and with the insignificant variations we mentioned earlier. Thus the Marxian law of value has a universal economic validity for an era lasting from the beginning of the exchange that transforms products into commodities down to the fifteenth century of our epoch. But commodity exchange dates from a time before any written history, going back to at least 3500 B.C. in Egypt, and 4000 B.C. or maybe even 6000 B.C. in Babylon; thus the law of value prevailed for a period of some five to seven millennia. We may now admire the profundity of Mr Loria in calling the value that was generally and directly prevalent throughout this time a value at which commodities never were sold nor could be sold, and which no economist will ever bother himself with if he has a glimmer of healthy common sense!” (Marx 1991: 1034–1038).

The passage in yellow highlighting is crucial: this is how Engels understood the theory of value in volume 1 of Capital at the end of his life.

This view is that commodities did historically tend to exchange at pure labour values in less developed forms of capitalism up until about the 15th century. That is, it actually happened in the pre-modern “period of simple commodity production” (Marx 1991: 1037).

Then what happened was that the “transition to metal money” obscured exchange at pure labour values:

“The most important and incisive progress was the transition to metal money, but this had the consequence that the determination of value by labour-time was no longer visibly apparent on the surface of commodity exchange. Money became the decisive measure of value for practical purposes, and all the more so, the more diverse were the commodities coming into trade, the more they originated from distant countries, and the less therefore the labour-time needed for their production could be checked. Even the money itself came mostly from abroad at first; and when it was obtained in a particular country as precious metal, the peasant and artisan were in no position to assess even approximately the labour applied to it, while their own awareness of the value-measuring property of labour was also pretty well obscured by the custom of reckoning in money; money came to represent absolute value in the popular conception.” (Marx 1991: 1037).

After this point, the advanced form of modern capitalist production developed and prices of production replaced labour values as the anchors for the price system.

This view of Engels is splendidly confirmed in a letter he wrote to Werner Sombart (1863–1941) on March 11, 1895 about the labour theory of value (on which, see here), which was a response to a hostile review of volume 3 of Capital by Sombart (1894).

The crucial passage from this letter of Engels is below:

“When commodity exchange began, when products gradually turned into commodities, they were exchanged approximately according to their value. It was the amount of labour expended on two objects which provided the only standard for their quantitative comparison. Thus value had a direct and real existence at that time. We know that this direct realisation of value in exchange ceased and that now it no longer happens. And I believe that it won’t be particularly difficult for you to trace the intermediate links, at least in general outline, that lead from directly real value to the value of the capitalist mode of production, which is so thoroughly hidden that our economists can calmly deny its existence. A genuinely historical exposition of these processes, which does indeed require thorough research but in return promises amply rewarding results, would be a very valuable supplement to Capital.”
Letter, Engels to W. Sombart, from London, March 11, 1895
https://www.marxists.org/archive/marx/works/1895/letters/95_03_11.htm

Unfortunately, Engels’ attempt to save the law of value in volume 1 – which was undoubtedly a development of Marx’s own desperate attempt to save it as we have seen above – is still a feeble and unconvincing theory.

Why? The reason is that Marx, in volume 1, never makes any such qualifications or limitations to the law of value. In fact, in volume 1, Marx states that money prices depend on the labour value embodied in units of gold or silver, so that long-run prices are determined by abstract socially-necessary labour time needed to produce relevant units of the money commodity (Marx 1906: 108, 111). But Marx says nothing about the rise of commodity money overthrowing his law of value in modern capitalist production.

At the same time, Marx thinks that the second mechanism driving prices is the fluctuation of labour values of commodities as against money (Marx 1906: 111). This is succinctly summed up in what Marx calls the “laws of the exchange of commodities” in Chapter 5 of volume 1:

“It is true, commodities may be sold at prices deviating from their values, but these deviations are to be considered as infractions of the laws of the exchange of commodities, which, in its normal state is an exchange of equivalents, consequently, no method for increasing value.” (Marx 1906: 176–177).

So either (1) Marx meant to apply this to modern capitalism in its contemporary form or (2) he was so incompetent and useless he never told his readers how the theory had to be strictly limited to pre-modern times. Either way Marx is damned.

Moreover – and as the death blow to the Marxist cult – there is no convincing empirical evidence for Marx’s and Engels’ attempt to salvage the law of value in volume 1 by restricting it to the past.

As a matter of fact, and as I have noted before, Piero Sraffa examined this question in the late 1920s by studying the anthropological and historical literature of his day, such as F. R. Eldridge’s Oriental Trade Methods (1923), Karl Bücher’s Industrial Evolution, Raymond Firth’s Primitive Economics of the New Zealand Maori (1929), and E. E. Hoyt’s Primitive Trade. Its Psychology and Economics (1926) and other works (Kurz and Salvadori 2010: 200–202). Sraffa found no evidence that time and labour played the fundamental role in determining exchange value in non-Western and less economically-developed societies (Kurz and Salvadori 2010: 200–201).

Bücher (1907: 19), for example, noted that in the absence of modern time-keeping methods, tribal societies seem to face severe difficulties even properly measuring time. How, then, can they have relied on labour time as the fundamental determinant of exchange value in the distant past?

Admittedly, I have not done a detailed survey of the most recent anthropological and historical literature on this question, but a quick look suggests that modern anthropology seems to confirm what Sraffa found, and that subjective utility, reciprocal satisfaction, ceremonial exchange, and fairness play the fundamental role in ancient, medieval and non-Western exchange of commodities, not labour time (e.g., Sahlins 1972; Firth 1965: 342; Gregory 2002). Indeed, the practice of “silent trade” where the parties do not even meet directly (Dale 2010: 91) appears to make a nonsense of the idea that pre-modern people engaged in commodity production determined exchange values in real commodity exchange by labour time.

If the modern literature upholds what Sraffa found, then not even Marx and Engels’ weak attempt to salvage the labour theory of value in volume 1 can be taken seriously.

Finally, we can see how the Temporal Single System Interpretation (TSSI) Marxists are engaged in an intellectually dishonest and contemptible perversion of Marx’s thought. One wonders whether these people have the slightest concern with what Marx actually wrote and thought rather than their own fantasy world readings of Marx.

Kurz, Heinz D. and Neri Salvadori. 2010. “Sraffa and the Labour Theory of Value: A Few Observations,” in John Vint et al. (eds.), Economic Theory and Economic Thought: Essays in Honour of Ian Steedman. Routledge, London and New York. 189–215.

Tuesday, August 11, 2015

Joan Robinson’s An Essay on Marxian Economics (1966) is her extended analysis and critique of Marxism, and this should be of great interest to Post Keynesians given Robinson’s role in developing Post Keynesian theory.

Some quick points:

(1) Although she finds some value in Marx, her condemnation of the labour theory of value is nevertheless fairly harsh: Robinson calls the labour theory of value a Marxist “incantation” and compares it to witchcraft (Robinson 1966: 22).

(2) Robinson (1966: 10) notes the contradictions between volume 1 and volume 3 of Capital, just as Eugen von Böhm-Bawerk did in his much earlier critique of Marx (Böhm-Bawerk 1896 = Böhm-Bawerk 1949: 3–120). Of the two theories of value, Robinson preferred Marx’s exposition in volume 3 of Capital, which was a rather more intricate formulation than the “simple dogmatism” of volume 1 (Robinson 1966: 10).

(3) Robinson, like other commentators, noted that Marx needed to reduce all heterogeneous human labour to a meaningful homogenous unit (Robinson 1966: 12), but this actually “leaves open the problem of assessing labour of different degrees of skill in terms of a unit of ‘simple labour’” (Robinson 1966: 19). This is also exactly the point I have made too. There is a severe aggregation problem here that is never adequately explained by Marxists.

(4) If individual commodity prices were directly equal to labour value (and all labour were paid a wage rate commensurate to the socially-necessary labour time of each worker), then the aggregate output prices would equal the aggregate value of labour. But the problem is that there are different organic compositions of capital throughout the economy (Robinson 1966: 15). But, as Robinson notes, by volume 3 it is conceded by Marx that the rate of exploitation is different in different industries and relative prices do not correspond to values (Robinson 1966: 15). It follows, Robinson concludes, that Marx’s theory cannot provide any theory of price determination (Robinson 1966: 17).

(5) Robinson points out that, since machines can make labour more productive, Marx’s saying that only labour produces value is a silly verbal game (Robinson 1966: 18).

In short, even one of the most influential founders of Post Keynesianism noted that contradiction between the theories of value in volume 1 and volume 3 of Capital, and the other problems and dogmas of Marxism.

BIBLIOGRAPHY
Böhm-Bawerk, Eugen von. 1949. “Karl Marx and the Close of His System,” in Paul. M. Sweezy (ed.), Karl Marx and the Close of His System and Böhm-Bawerk’s Criticism of Marx. August M. Kelley, New York. 3–120.

Saturday, August 8, 2015

In fact, it happens in two obscure footnotes in Chapters 5 and 9 in volume 1 of Capital.

The first comes in a footnote at the end of Chapter 5 in which Marx discusses the nature of capital. I give the relevant part of the main text with the footnote below:

“The conversion of money into capital has to be explained on the basis of the laws that regulate the exchange of commodities, in such a way that the starting point is the exchange of equivalents.1”

[Footnote]
(1) “From the foregoing investigation, the reader will sec that this statement only means that the formation of capital must be possible even though the price and value of a commodity be the same; for its formation cannot be attributed to any deviation of the one from the other. If prices actually differ from values, we must, first of all, reduce the former to the latter, in other words treat the difference as accidental in order that the phenomena may be observed in their purity, and our observations not interfered with by disturbing circumstances that have nothing to do with the process in question. We know, moreover, that this reduction is no mere scientific process. The continual oscillation in prices, their rising and falling, compensate each other, and reduce themselves to an average price, which is their hidden regulator. It forms the guiding star of the merchant or the manufacturer in every undertaking that requires time. He knows that when a long period of time is taken, commodities are sold neither over nor under, but at their average price. If therefore he thought about the matter at all, he would formulate the problem of the formation of capital as follows: How can we account for the origin of capital on the supposition that prices are regulated by the average price, i.e., ultimately by the value of the commodities? I say ‘ultimately,’ because average prices do not directly coincide with the values of commodities, as Adam Smith, Ricardo, and others believe.” (Marx 1906: 184–185, n. 1).

So here Marx is referring to the idea, taken from the Classical economists, that real world prices fluctuate around prices of production (or Classical equilibrium prices based on cost of production plus a uniform rate of profit), and that he admits that these prices of production do not equal labour values. This appears to be the first point where Marx raises this issue, and it is astonishing something so important is relegated to a footnote, when it contradicts the theory of value in the first chapters of Capital.

Now the second footnote comes in Chapter 9 and relates to Marx’s examples in this chapter:

“The calculations given in the text are intended merely as illustrations. We have in fact assumed that prices = values. We shall, however, see in Volume III., that even in the case of average prices the assumption cannot be made in this very simple manner.” (Marx 1906: 244, n. 1).

However, the context shows that the “calculations” where Marx assumes that value equals price are merely those in Chapter 9, and this can hardly be taken to be a statement where Marx is saying that all examples throughout volume 1 assume value equals price. Nevertheless, as in the first footnote, Marx notes that “average prices” (or prices of production) cannot be taken to be equal to labour values.

As is often pointed out by critics, the theory of value in volume 3 of Capital contradicts that in volume 1, and these two footnotes intrude into the theory in volume 1 and hint at the different theory in volume 3. Once we accept the value theory of Marx in volume 3, so much of volume 1 becomes nonsense and worthless, as, for example, the following:

(1) Marx thinks that the labour value of units of gold or silver have a tendency to determine prices (as discussed here).

(2) The idea that it is possible to accurately measure the value of skilled labour by looking at the exchange values of products of skilled labour as against products of unskilled labour (Marx 1906: 51–52) makes no sense unless Marx really believes that commodities tend to exchange at pure labour values.

(3) Marx states explicitly that:

“It is true, commodities may be sold at prices deviating from their values, but these deviations are to be considered as infractions of the laws of the exchange of commodities, which, in its normal state is an exchange of equivalents, consequently, no method for increasing value.” (Marx 1906: 176–177).

All these are rendered false and absurd if prices only ever equal labour values rarely and by accident.

Now it might seem strange that Marx contradicts himself in the footnotes, but it is not that surprising because Marx wrote drafts of volumes 2 and 3 of Capitalbefore volume 1 (see here), and it is likely that, under pressure from Engels to produce a work in defence of communism, Marx’s ideological commitments skewed volume 1 so that it presented capitalism in the worst light possible and with an extreme and dogmatic defence of the labour theory of value, which, in view of his work on the draft of volume 3 of Capital, Marx knew to have severe problems, such as the transformation problem.

That is very probably why Marx never bothered to publish volumes 2 and 3 of Capital in his lifetime. The suspicion is that he never did so because he was unsatisfied with his attempts to defend the labour theory in volume 3, and only ever hinted at these problems in volume 1, and if he had gone into extensive details the whole theory of value in volume 1 would have been shattered.

BIBLIOGRAPHY
Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Friday, August 7, 2015

“But, although the money that performs the functions of a measure of value is only ideal money, price depends entirely upon the actual substance that is money. The value, or in other words, the quantity of human labour contained in a ton of iron, is expressed in imagination by such a quantity of the money-commodity as contains the same amount of labour as the iron. According, therefore, as the measure of value is gold, silver, or copper, the value of the ton of iron will be expressed by very different prices, or will be represented by very different quantities of those metals respectively.

If, therefore, two different commodities, such as gold and silver, are simultaneously measures of value, all commodities have two prices—one a gold-price, the other a silver-price. These exist quietly side by side, so long as the ratio of the value of silver to that of gold remains unchanged, say, at 15:1. Every change in their ratio disturbs the ratio which exists between the gold-prices and the silver-prices of commodities, and thus proves, by facts, that a double standard of value is inconsistent with the functions of a standard.” (Marx 1906: 108).

“A general rise in the prices of commodities can result only, either from a rise in their values—the value of money remaining constant—or from a fall in the value of money, the values of commodities remaining constant. On the other hand, a general fall in prices can result only, either from a fall in the values of commodities—the value of money remaining constant—or from a rise in the value of money, the values of commodities remaining constant. It therefore by no means follows, that a rise in the value of money necessarily implies a proportional fall in the prices of commodities; or that a fall in the value of money implies a proportional rise in prices. Such change of price holds good only in the case of commodities whose value remains constant. With those, for example whose value rises, simultaneously with, and proportionally to, that of money, there is no alteration in price. And if their value rise either slower or faster than that of money, the fall or rise in their prices will be determined by the difference between the change in their value and that of money; and so on.” (Marx 1906: 111).

In the first passage, Marx is saying that money prices depend on the labour value embodied in units of gold or silver, so that long-run prices are determined by abstract socially-necessary labour time needed to produce relevant units of the money commodity.

This is confirmed in the second passage where Marx also notes that the second mechanism driving prices is the fluctuation of labour values of commodities as against money.

It is also no surprise that for Marx money must by necessity be a produced commodity with a labour value in order to even function as money, and commodity money like gold or silver, when it is initially brought to market, is exchanged with other goods with an equal socially necessary labour time value as a barter transaction (Marx 1906: 122).

It is clearly the case that the theory of value in volume 1 of Capital is that individual commodity prices are determined by their labour values or the labour value embodied in units of gold or silver, at least in the long-run. Marx admits that prices can and do diverge from labour values (Marx 1906: 114), but he appears to think that are driven back to these values which are the anchors for the system:

“It is true, commodities may be sold at prices deviating from their values, but these deviations are to be considered as infractions of the laws of the exchange of commodities, which, in its normal state is an exchange of equivalents, consequently, no method for increasing value.” (Marx 1906: 176–177).

“The production of commodities must be fully developed before the scientific conviction emerges, from experience itself, that all the different kinds of private labour (which are carried on independently of each other; and yet, as spontaneously developed branches of the social division of labour, are in a situation of all-round dependence on each other) are continually being reduced to the quantitative proportions in which society requires them. The reason for this reduction is that in the midst of the accidental and ever-fluctuating exchange relations between the products, the labour-time socially necessary to produce them asserts itself as a regulative law of nature. In the same way, the law of gravity asserts itself when a person’s house collapses on top of him. The determination of the magnitude of value by labour-time is therefore a secret hidden under the apparent movements in the relative values of commodities.” (Marx 1982: 168).

Marx also states in Chapter 1 that it is possible to accurately measure the value of skilled labour by looking at the exchange values of products of skilled labour as against products of unskilled labour (Marx 1906: 51–52), and this makes no sense unless Marx really believes that commodities tend to exchange at pure labour values.

BIBLIOGRAPHY
Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Thursday, August 6, 2015

The Austrian economist Eugen von Böhm-Bawerk’s critique of Marx can be found in his essay “Zum Abschluss des Marxschen Systems” (1896), which is available in an English translation as “Karl Marx and the Close of His System” in Böhm-Bawerk (1949: 3–120).

Paul M. Sweezy summarises Böhm-Bawerk’s case against Marx:

“After a brief introduction, he devotes two chapters to setting out Marx’s theories of value, surplus value, average rate of profit, and price of production—‘for the sake of connection,’ as he says. On the basis of this exposition he concludes that Marx had not one but two theories of value (one in Volume I of Capital and another in Volume III) in Böhm-Bawerk’s sense of the term, that is, market exchange ratios. Moreover, according to Böhm-Bawerk, these two theories lead to different results, not occasionally or exceptionally but regularly and as a matter of principle. Hence, Böhm-Bawerk ‘cannot help himself’; he is forced to the conclusion that there is a contradiction between Volume I and Volume III of Capital. He next proceeds to analyze at length—more than a third of the whole critique is devoted to this—the arguments by which, according to Böhm-Bawerk, Marx seeks to prove that the contradiction is only apparent and that the theory of Volume I is valid, after all. Having disposed of these arguments one by one, Böhm-Bawerk is at last ready to deal with the heart of the matter, ‘the error in the Marxian system,’ for it is by now clear that error there must be. Naturally, he finds that the error lies in the fact that Marx started from the old-fashioned and exploded labor theory of value instead of pushing his way through to the new and scientifically correct subjective theory of value. This error ramifies throughout the system and vitiates it from top to bottom.” (Sweezy 1949: xiii–xiv).

Those on the left who from their own reading of Marx happen to hold the same opinion as Böhm-Bawerk – that Marx’s value theory in volume 1 of Capital is radically inconsistent with the value theory in volume 3 – are not endorsing Austrian economics or anything else Böhm-Bawerk said. It is pathetic to see Marxists trying to smear their opponents by using a blatant ad hominem argument here.

In fact, one need not accept anything else in Austrian economics to agree with Böhm-Bawerk on this point. One need not even accept that subjective value is the fundamental or only cause of exchange value/price to see that Böhm-Bawerk’s criticisms have some merit.

As Böhm-Bawerk (1949: 10–11) points out, it is obvious that in volume 1 of Capital Marx refers to labour value determining real individual exchange values, as a type of regulative law of exchange value, and this can be seen in Chapter 1 and in Chapter 3 in Marx’s analysis of money.

Even though conditions of supply and demand cause prices to deviate from their pure labour values, they are brought back to them in a kind of equilibrium process:

“The production of commodities must be fully developed before the scientific conviction emerges, from experience itself, that all the different kinds of private labour (which are carried on independently of each other; and yet, as spontaneously developed branches of the social division of labour, are in a situation of all-round dependence on each other) are continually being reduced to the quantitative proportions in which society requires them. The reason for this reduction is that in the midst of the accidental and ever-fluctuating exchange relations between the products, the labour-time socially necessary to produce them asserts itself as a regulative law of nature. In the same way, the law of gravity asserts itself when a person’s house collapses on top of him. The determination of the magnitude of value by labour-time is therefore a secret hidden under the apparent movements in the relative values of commodities.” (Marx 1982: 168).

“It is not money that renders commodities commensurable. Just the contrary. It is because all commodities, as values, are realised human labour, and therefore commensurable, that their values can be measured by one and the same special commodity, and the latter be converted into the common measure of their values, i.e., into money. Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time.” (Marx 1906: 106).

When Marx, for example, says that it is possible to accurately measure the value of skilled labour by looking at the exchange values of products of skilled labour as against products of unskilled labour (Marx 1906: 51–52), this makes no sense unless Marx really believes that commodities tend to exchange at pure labour values.

Furthermore, for Marx money must by necessity be a produced commodity with a labour value in order to even function as money, and commodity money like gold or silver, when it is initially brought to market, is exchanged with other commodities with an equal socially necessary labour time value as a barter transaction (Marx 1906: 122). And Marx thought that prices are determined by (at the least) (1) the long-run labour value of gold as determined by the abstract socially necessary labour time required for gold’s production and (2) as this labour value of gold relates in exchange to the labour value of other commodities (Marx 1906: 108) (on this, see here). Of course, these ideas, if taken seriously, require that the actual exchange value of gold as money against other commodities gravitates around the long-run value of the abstract socially necessary labour time needed to produce gold.

But in volume 3 Marx abandons the idea that individual exchange values tend to equal abstract socially-necessary labour time in his attempts to solve the transformation problem and in his acceptance that Classical prices of production are the long-run anchors for prices:

“To speak plainly his solution [sc. to the transformation problem] is obtained at the cost of the assumption from which Marx has hitherto started, that commodities exchange according to their values. This assumption Marx now simply drops.” (Böhm-Bawerk 1949: 21).

“And the actual exchange relation of the separate commodities is no longer determined by their values but by their prices of production; or as Marx likes to put it ‘the values change into prices of production’ (III, 231). Value and price of production are only exceptionally and accidentally coincident, namely, in those commodities which are produced by the aid of a capital, the organic composition of which chances to coincide exactly with the average composition of the whole social capital. In all other cases value and production price necessarily and in principle part company.” (Böhm-Bawerk 1949: 24).

But that radically contradicts what Marx said in volume 1 of Capital, and Böhm-Bawerk points to the paradox:

“‘Either products do actually exchange in the long run in proportion to the labor attaching to them—in which case an equalization of the gains of capital is impossible; or there is an equalization of the gains of capital—in which case it is impossible that products should continue to exchange in proportion to the labor attaching to them.’” (Böhm-Bawerk 1949: 28).

“I do not think that any one who examines the matter impartially and soberly can remain long in doubt. In the first volume it was maintained, with the greatest emphasis, that all value is based on labor and labor alone, and that values of commodities were in proportion to the working time necessary for their production. These propositions were deduced and distilled directly and exclusively from the exchange relations of commodities in which they were ‘immanent.’ We were directed ‘to start from the exchange value, and exchange relation of commodities, in order to come upon the track of the value concealed in them’ (I, 55). The value was declared to be ‘the common factor which appears in the exchange relation of commodities’ (I, 45). We were told, in the form and with the emphasis of a stringent syllogistic conclusion, allowing of no exception, that to set down two commodities as equivalents in exchange implied that ‘a common factor of the same magnitude’ existed in both, to which each of the two ‘must be reducible’ (I, 43). Apart, therefore, from temporary and occasional variations which ‘appear to be a breach of the law of the exchange of commodities’ (I, 177), commodities which embody the same amount of labor must on principle, in the long run, exchange for each other. And now in the third volume we are told briefly and dryly that what, according to the teaching of the first volume, must be, is not and never can be; that individual commodities do and must exchange with each other in a proportion different from that of the labor incorporated in them, and this not accidentally and temporarily, but of necessity and permanently.

I cannot help myself; I see here no explanation and reconciliation of a contradiction, but the bare contradiction itself. Marx’s third volume contradicts the first. The theory of the average rate of profit and of the prices of production cannot be reconciled with the theory of value. This is the impression which must, I believe, be received by every logical thinker.” (Böhm-Bawerk 1949: 29–30).

Many other critics of Marx have argued the same thing (Shove 1944: 48–49; Robinson 1966: 10, 14).

The most important of them was that, when the profit rate is equalised and stands at an average percentage of profit, prices above values and prices below values cancel out so that in the aggregate prices equal value (Böhm-Bawerk 1949: 32). But, given that labour value cannot even be properly defended in the first place, this is an absurd and empirically empty idea lacking any explanatory power.

Böhm-Bawerk knew this fundamental problem well: economists have no reason to accept the basic labour theory of value in the first place (Böhm-Bawerk 1949: 64–66).

That idea that exchange value fundamentally depends on quantities of labour expended in production of commodities is not “self-evident” (Böhm-Bawerk 1949: 65). That is, it is not some empirical proposition confirmed by convincing and clear evidence:

“Now it is certain that the exchange values, that is to say the prices of the commodities as well as the quantities of labor which are necessary for their reproduction, are real, external quantities, which on the whole it is quite possible to determine empirically. Obviously, therefore, Marx ought to have turned to experience for the proof of a proposition the correctness or incorrectness of which must be manifested in the facts of experience; or in other words, he should have given a purely empirical proof in support of a proposition adapted to a purely empirical proof. This, however, Marx does not do. And one cannot even say that he heedlessly passes by this possible and certainly proper source of knowledge and conviction. The reasoning of the third volume proves that he was quite aware of the nature of the empirical facts, and that they were opposed to his proposition. He knew that the prices of commodities were not in proportion to the amount of incorporated labor, but to the total cost of production, which comprises other elements besides. He did not therefore accidentally overlook this, the most natural proof of his proposition, but turned away from it with the full consciousness that upon this road no issue favourable to his theory could be obtained.” (Böhm-Bawerk 1949: 66).

The remaining parts of Böhm-Bawerk’s essay mostly focus on diminishing marginal utility theory as an alternative theory of value, but one simply does not need to accept this to see the merits of Böhm-Bawerk’s critique as sketched above.

BIBLIOGRAPHY
Böhm-Bawerk, Eugen von. 1949. “Karl Marx and the Close of His System,” in Paul. M. Sweezy (ed.), Karl Marx and the Close of His System and Böhm-Bawerk’s Criticism of Marx. August M. Kelley, New York. 3–120.

Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; trans. Samuel Moore and Edward Aveling from 3rd German edn.; rev. from 4th German edn. by Ernest Untermann). The Modern Library, New York.

Sunday, August 2, 2015

Chapter 8 of volume 1 of Capital is called “Constant Capital and Variable Capital” (Marx 1990: 307), and it discusses non-labour factors (constant capital) and living labour (variable capital).

Marx divides capital as factors of production into two categories:

(1) constant capital, and

(2) variable capital (Marx 1990: 317).

Constant capital is the means of production used in the production process whose values are merely transferred to the output product (Marx 1990: 307; Harvey 2010: 128).

How do fixed and durable capital goods transfer value? For Marx, they do so gradually day by day during their working lifetime:

“If therefore an article loses it utility, it also loses its value. The reason why means of production do not lose their value, at the same time that they lose their use-value, is this: they lose in the labour-process the original form of their use-value, only to assume in the product the form of a new use-value. But, however important it may be to value, that it should have some object of utility to embody itself in, yet it is a matter of complete indifference what particular object serves this purpose; this we saw when treating of the metamorphosis of commodities. Hence it follows that in the labour-process the means of production transfer their value to the product only so far as along with their use-value they lose also their exchange value. They give up to the product that value alone which they themselves lose as means of production. But in this respect the material factors of the labour-process do not all behave alike.

The coal burnt under the boiler vanishes without leaving a trace; so, too, the tallow with which the axles of wheels are greased. Dye stuffs and other auxiliary substances also vanish but re-appear as properties of the product. Raw material forms the substance of the product, but only after it has changed its form. Hence raw material and auxiliary substances lost the characteristic form with which they are clothed on entering the labour-process. It is otherwise with the instruments of labour. Tools, machines, workshops, and vessels, are of use in the labour-process, only so long as they retain their original shape, and are ready each morning to renew the process with their shape unchanged. And just as during their lifetime, that is to say, during the continued labour-process in which they serve, they retain their shape independent of the product, so, too, they do after their death. The corpses of machines, tools, workshops, &c, are always separate and distinct from the product they helped to turn out. If we now consider the case of any instrument of labour during the whole period of its service, from the day of its entry into the workshop, till the day of its banishment into the lumber room, we find that during this period its use-value has been completely consumed, and therefore its exchange value completely transferred to the product. For instance, if a spinning machine lasts for 10 years, it is plain that during that working period its total value is gradually transferred to the product of the 10 years. ….

It is known by experience how long on the average a machine of a particular kind will last. Suppose its use-value in the labour-process to last only six days. Then, on the average, it loses each day one-sixth of its use-value, and therefore parts with one-sixth of its value to the daily product. The wear and tear of all instruments, their daily loss of use-value, and the corresponding quantity of value they part with to the product, are accordingly calculated upon this basis.” (Marx 1906: 225–227).

However, it is not quite clear here what happens if, for some reason, a durable capital good does not last for its average lifetime. Does such a machine still transfer its full value but in a shorter period of time?

It is particularly interesting that, for Marx, factors of production that have no embodied labour value transfer no value into the output commodity:

“It is thus strikingly clear, that means of production never transfer more value to the product than they themselves lose during the labour-process by the destruction of their own use-value. If such an instrument has no value to lose, if, in other words, it is not the product of human labour, it transfers no value to the product. It helps to create use-value without contributing to the formation of exchange value. In this class are included all means of production supplied by Nature without human assistance, such as land, wind, water, metals in situ, and timber in virgin forests.” (Marx 1906: 227).

This is a development of Marx’s idea in Chapter 1, as follows:

“A thing can be a use-value, without having value. This is the case whenever its utility to man is not due to labour. Such are air, virgin soil, natural meadows, &c. A thing can be useful, and the product of human labour, without being a commodity.” (Marx 1906: 47–48).

That is to say, things that are not produced by human labour have no real labour value (e.g., air, uncultivated soil, natural meadows) and only fetch an “imaginary” money price (Marx 1906: 115). But, since a large number of capital goods bought by capitalists must be included in the list of things that Marx thinks have no labour value, we have a severe problem here. Many such goods used in production processes that for Marx have only “imaginary” money prices and no labour values still from part of the monetary costs of production for capitalists and are used to calculate cost-based mark-up prices. Therefore the whole theory of exchange value in volume 1 of Capital is undermined, for goods cannot tend to exchange at pure or true labour values when many of them have prices that include mere “imaginary” money prices of factor inputs with no labour values (such as land, water, metals in situ, and timber in virgin forests, etc). This is yet another terrible problem for Marx’s labour theory of value.

To return to Marx’s analysis of constant capital, he thinks that even material necessarily wasted in a normal and average production process can transfer its value (Marx uses the example of wasted cotton in spinning yarn: Marx 1990: 313). But what happens if the necessary waste can be re-used in a new production process? Does it transfer value to both output products or just one? Marx does not explain this.

Furthermore, it is obvious that many durable capital goods of the same type will last for different times in different factories or businesses. Is it really the case that a machine worth $100,000 that lasts for 1 year and working for 360 days transfers $277.77 of value into each unit of output it produces (with price reflecting this), but the same type of machine worth $100,000 that lasts for 10 years and working for 3600 days transfers only $27.77 into each unit of output it produces in that time? (and with a price for the output goods also reflecting this). If so, there would have to be a radical price difference in the output goods produced by each machine if they exchange at their pure labour value, but this is absurdly contrary to what happens in the real world, where prices would be the same and the company would just have some warranty on the machine (and obtain a new one) or insure it (and claim a loss for one that broke down after a year).

Crucially, constant capital can never transfer more value than it has itself:

“We have seen that the means of production transfer value to the new product, so far only as during the labour-process they lose value in the shape of their old use-value. The maximum loss of value that they can suffer in the process, is plainly limited by the amount of the original value with which they came into the process, or in other words, by the labour-time necessary for their production. Therefore the means of production can never add more value to the product than they themselves possess independently of the process in which they assist. However useful a given kind of raw material, or a machine, or other means of production may be, though it may cost £150, or, say, 500 days’ labour, yet it cannot, under any circumstances, add to the value of the product more than £150. Its value is determined not by the labour-process into which it enters as a means of production, but by that out of which it has issued as a product. In the labour-process it only serves as a mere use-value, a thing with useful properties, and could not, therefore, transfer any value to the product, unless it possessed such value previously.” (Marx 1906: 229).

But it is living labour that adds new value to products:

“It is otherwise with the subjective factor of the labour-process, with labour-power in action. While the labourer, by virtue of his labour being of a specialised kind that has a special object, preserves and transfers to the product the value of the means of production, he at the same time, by the mere act of working, creates each instant an additional or new value. Suppose the process of production to be stopped just when the workman has produced an equivalent for the value of his own labour-power, when, for example, by six hours’ labour, he has added a value of three shillings. This value is the surplus, of the total value of the product, over the portion of its value that is due to the means of production. It is the only original bit of value formed during this process, the only portion of the value of the product created by this process. Of course, we do not forget that this new value only replaces the money advanced by the capitalist in the purchase of the labour-power, and spent by the labourer on the necessaries of life. With regard to the money spent, the new value is merely a reproduction; but, nevertheless, it is an actual, and not, as in the case of the value of the means of production, only an apparent, reproduction. The substitution of one value for another, is here effected by the creation of new value.

We know, however, from what has gone before, that the labour-process may continue beyond the time necessary to reproduce and incorporate in the product a mere equivalent for the value of the labour-power. Instead of the six hours that are sufficient for the latter purpose, the process may continue for twelve hours. The action of labour-power, therefore, not only reproduces its own value, but produces value over and above it. This surplus-value is the difference between the value of the product and the value of the elements consumed in the formation of that product, in other words, of the means of production and the labour-power.” (Marx 1906: 231–232).

The labour value of constant capital does, however, change if the prior production conditions for that commodity change (Marx 1990: 318).

Changes in productivity tend to decrease the abstract labour time needed for a given unit of output but increase the amount of constant capital needed (Marx 1990: 319).